Health Savings Account: Is An HSA Right For You?

A Health Savings Account, or HSA, provides a tax-advantaged way to pay for eligible medical, prescription, dental, and vision expenses. As insurance premiums continue to rise, HSAs have grown in popularity as consumers seek more flexibility and discretion over how their healthcare dollars are spent.

However, HSAs are not available to every participant in the Federal Employees Health Benefits (FEHB) Program. To open an HSA, you have to enroll in a High Deductible Health Plan (HDHP), and you cannot be claimed as a dependent on someone else’s tax return or have any other health insurance coverage including Medicare and TRICARE.

An HDHP typically has lower premiums and higher deductibles than a traditional plan. For 2022, the minimum deductible and maximum out-of-pocket amount for a high-deductible health plan are in the following table:

Despite being associated with an HDHP, HSAs are very attractive because they offer a triple tax advantage. An HSA combines the tax benefits of a traditional TSP account and a Roth IRA into one vehicle. Contributions into an HSA are not taxed, interest and investment earnings grow tax-free, and distributions from an HSA are not taxed if used to pay for qualified medical expenses for you, your spouse, and your dependents, even if they are not covered by an HDHP.

HSAs are administered by financial institutions, but are funded by your healthcare provider with a premium pass through, which is a portion of your monthly HDHP premium. Many of the plans provide a premium pass through that ranges from $75 to $100 per month or double that amount if more than one person is covered under your plan. You can make extra tax-free contributions to your HSA as long as total contributions do not exceed $3,650 for an individual and $7,300 for a family. An additional $1,000 catch-up contribution is allowed if you are between the ages of 55 and 65.

Unlike a Health Care Flexible Spending Account (HCFSA), an HSA does not require you to re-enroll each year, and it does not have a carryover limit. Any unused balance in the HSA automatically rolls over from year to year and the funds remain your assets if you switch plans, change employment, or retire from federal service. Even if you are not eligible to contribute to the HSA for any particular reason, you are still eligible to withdraw from the HSA to pay for qualified medical expenses including your copays, coinsurance, deductible, Medicare premiums, and long-term care premiums.

If withdrawals are made for non-qualified expenses, federal and state income taxes would need to be paid. If you are under age 65, an additional 20 percent penalty will be assessed on the amount withdrawn. After age 65, you won’t pay the penalty, but the distribution will still be subject to income tax. An HSA does not have required minimum distributions when you reach age 72 like the TSP or traditional IRA.

You have the right to designate a beneficiary or beneficiaries to receive your remaining HSA funds when you pass away. With a spousal beneficiary, your HSA will be transferred to your surviving spouse and he or she will receive all the benefits of account ownership. The spouse can continue to make tax-free withdrawals to pay for eligible health care expenses. If you designate an individual other than a spouse, the remaining balance of your HSA will be distributed to the beneficiary and taxed as income at fair market value in the year you pass away.

So, is an HSA right for you? The final verdict may depend on several factors including your health care status, emergency savings fund, tax reduction plans, and future retirement goals. Health savings accounts may be most appealing to an individual or family that has relatively limited medical needs and expenses, can afford to pay out-of-pocket health care costs, and could take advantage of the tax benefits and long-term savings of an HSA. A federal employee or retiree should compare the pros and cons of an HDHP and HSA to other health insurance and savings plan options.

If you choose to enroll in a high-deductible health plan with an HSA, it can be helpful to think about your HSA as an additional retirement account that is specially designed to cover medical expenses. Here is a strategy to help maximize the long-term value of your HSA:

• Contribute to your HSA each year up to the maximum allowable amount.
• Allow your HSA funds to compound over the years by paying your unreimbursed medical expenses with after-tax dollars. You can also establish a Limited Expense Health Care Flexible Spending Account (LEX HCFSA) to help cover eligible dental and vision expenses.
• Invest the money in your HSA for long-term growth similar to your TSP and other retirement accounts.
• In retirement, use your HSA to pay for qualified health care expenses.

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